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India Monetary Policy Panel Stays Vigilant on Cost Pressures

Updated on
  • Patel highlights recent upturn in crude prices as concerning
  • Lone dove says slow economic recovery is the greater worry

Most members in India’s six-member monetary policy committee adopted a hawkish tone on inflation, underpinning market expectations that the rate easing cycle might be coming to an end.

While five on the six-member committee voted to keep the key policy rate unchanged this month, one member said the Reserve Bank of India should ease. Governor Urjit Patel said the macroeconomic situation remained broadly unchanged while an upturn in crude prices was a source of concern, according to minutes of the Dec. 5-6 meeting published Wednesday.

The RBI had decided to keep rates unchanged at 6 percent. It slightly raised its inflation forecast to a range of 4.3 percent-4.7 percent for the October-March period, higher than its 4 percent medium-term target and the previous projection of 4.2 percent to 4.6 percent. The rate hit a 15-month high of 4.9 percent in November while core inflation -- which strips out volatile food and fuel -- jumped by the most since the Bloomberg index was created in 2015.

Read more: Stagflation Risks Could See India Hold Rates Through 2018

Despite price-gains which have been accelerating for five straight months, private consumption has lagged and in July-September it was the lowest in seven quarters, raising concerns about stagflation.

Growth Rebound

Still, most members said the slowdown that gripped the country after the cash ban and the chaotic introduction of the goods and services tax was probably over and growth was likely to recover in coming months. Growth is expected to rebound to 7.5 percent in the year through March 2019 from an estimated 6.7 percent this year on the back of higher private consumption and investment demand, according to the median of 32 forecasters surveyed by the RBI.

"There seems little scope for accommodation or for change of stance at the present juncture," Deputy Governor Viral Acharya said.

Governor Patel reiterated his commitment "to keeping headline inflation close to 4 percent on a durable basis." He’s betting that previous cuts and a $32 billion recapitalization plan for state-run banks will help jump start lending, boost growth and possibly narrow a yawning output gap in 2018. Maintaining a neutral policy stance, Patel said, "allows us the flexibility to respond appropriately to incoming data."

Slow Pace

Acharya, the deputy governor in charge of monetary policy, said transmission of previous easing had to improve before a growth push. Another central banker and arch hawk Michael Patra said the "time has come for monetary policy to take guard and be ready to go on to the front foot".

That was in sharp contrast to arch-dove Ravindra Dholakia, who argued there was enough slack in the economy and inflation would rise only marginally, leaving enough room for more cuts.

"The real cause of concern right now is the economic recovery and its slow pace," Dholakia said.

MPC MEMBERDECEMBEROCTOBER
Patel (slight hawk)"Several uncertainties, especially on the fiscal and external fronts, persist. It is, therefore, important to be vigilant. Hence, I vote for status quo in the policy rate, while maintaining the stance as neutral; this allows us the flexibility to respond appropriately to incoming data.""For keeping headline inflation close to 4 percent on a durable basis, it is important to recognize near and medium-term risks to the inflation outlook. We have to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach"
Acharya (hawk)"There seems little scope for accommodation or for change of stance at the present juncture. Incoming data will be key to shape the policy going forward.""Given our inflation outlook has risen quite some distance over the target of 4 percent, there did not seem much room for monetary policy adjustment"
Dua (middle)"In the current scenario, a wait and watch strategy is recommended, with continuous monitoring of data.""In the current scenario, a wait and watch strategy is recommended with continuous monitoring of data to distinguish between a temporary effect and a long-lasting, structural impact"
Dholakia
(uber-dove)
"By cutting the policy rate, the domestic corporate bond market, stock market and hence investment demand could be encouraged and growth can be accelerated to bridge the output gap.""We can still make the additional cut of 25 bps now if we want to be extremely cautious. Otherwise, my opinion is that we have a space for a cut of about 40 bps at present with due consideration to any possible upward risk to future inflation"
Ghate
(middle)
"Compared to the last review, various risks are materializing around inflation becoming generalized and need to be watched carefully.""With a roughly 200 basis points increase in headline inflation in the last two months, and with the acceleration of inflation excluding food and fuel to 4.6 percent from 4.1 percent, upside risks to the medium term inflation target of 4 percent have again come to the fore"
Patra
(uber-hawk)
"It is time now to signal its end and commence the withdrawal of accommodation, consistent with the evolving stance of liquidity management""It is time to be in readiness to raise the policy rate to quell the underlying drivers of inflation if they strengthen further"
(Updates with comments from governor in seventh paragraph. An earlier version corrected spelling of deputy governor’s name in sixth paragraph.)
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